More important than Brexit – our accumulated trade deficit

This all voters need to know. More important than the Brexit trade deals is the UK trade deficit. It is sometimes called the “hidden deficit”. It is usually measured by the Current Account and is running at just under £100 billion a year, or about 5% of GDP. This is big money. Each household is spending £2k a year more on goods, services, holidays and companies from abroad than we are earning. Although these patterns can go on for a long while, they also have a habit of being called to account. It is not unreasonable to say that every household, to pay its way, should expect a fall in income of £2k to address this deficit. This, not Brexit, is the main trade issue we face.

How will it work out? It is likely to result in a fall in the pound much bigger than we have already had, raising the cost of living for holidays, food, clothes and most raw materials. But how will it actually happen? It may well be catastrophic. To see this we need a bit of history and economics.

This deficit has been going on for three decades, ever since North Sea oil in the Thatcher era hit our exports. In fact we have overspent an average of at least 2% of GDP for thirty years, or a total of 60% plus over the whole period. How have we coped? Some of this money has been used to buy shares in British companies. This was welcomed by Thatcher and the Conservatives since then. At the end of 2014 foreign investors owned 54% of UK domiciled companies, putting some £930bn, nearly £1trillion, into UK shares. It is somewhat ironic that at Brexit most of UK companies are owned by foreigners. Some of it holds UK Government debt. Lots of it has bought plush houses in London and elsewhere; Private Eye identified £170bn of such property in 2015. We are in hock. The effects are obscured by international banking centred in London, where, because of Conservative and New Labour deregulation, money sloshes in from around the world.

This is not stable. If foreigners withdraw from shares, housing or debt, the £ will fall. If bankers feel that the UK is no longer a good place to hold assets, a similar effect will take place. This seems likely during the next few years, earlier rather than later, and the only way of trying to hold it will be for the Bank of England to increase interest rates, which it cannot do without creating a housing and debt crisis. It will be a big crisis, which can only be addressed now by a sustained fall in the £.
That is what the politicians should be telling you, not the charade May and the Conservatives are presently mounting over Brexit .